Dissolving a marriage is a taxing and potentially gut-wrenching process for anyone. But when a CEO goes through such an event, boards have to walk the line between allowing their chief executive and fellow board member to have a private life and ensuring that the company CEO is delivering results and performing up to expectations.

Directors say a breakup between a CEO and his or her spouse is something the board should be aware of without getting into gritty detail, much like the CEO’s health. A divorce doesn’t warrant concern or even much discussion unless it becomes apparent that the CEO’s productivity has been affected or that the company could suffer as a result. In such cases, boards may have to provide additional support to the CEO or possibly consider hiring a replacement, even if it might seem like kicking the CEO when they’re down.

Robert S. Miller, chairman at American International Group and a board member atSymantec, says the real questions for directors during a divorce are whether the process is going to be a distraction for the CEO, and whether something will come out during the proceedings that will affect the company’s reputation.

Miller says it’s helpful if the CEO advises the independent chair or lead director about what’s going on so the board is at least informed of the situation.

“Every board is different and has to use their best judgment in terms of the balance of the privacy of the individual versus protecting the interests of the corporation,” he says. “A CEO in his or her personal life may have lost a lot of money in an investment or suffered the death of a child or any number of things that could affect and distract the CEO; those are things the board needs to pay attention to.”

Larraine Segil, a longtime director who currently serves on the Frontier Communications board, agrees.

Segil says if something going on in a CEO’s life is affecting their ability to lead the company, the board needs to get involved. If not, there’s no need for concern.

“The consequences of going through a divorce do rise to the attention of the board of directors,” says Segil, “but the divorce itself is none of their business.”

Indeed, an article published this month as part of Stanford University’s “Closer Look” series suggests that divorce can potentially impact the CEO’s focus, risk appetite and ownership stake in the company.

“Divorce is a kind of trauma for the person and potentially for the company, and I think from a board perspective, directors will want to think through [the implications],” says David Larcker, a co-author of the article and director of the Center for Leadership Development and Research at the Stanford Graduate School of Business.

The article, “Separation Anxiety: The Impact of CEO Divorce on Shareholders,” suggests that a CEO divorce can impact a company in several ways.

First, the CEO’s ownership stake could shrink considerably as a result of a divorce settlement. For example, in September Best Buy issued a statement regarding company president and CEO Hubert Joly’s exercise and sale of 350,467 stock options and sale of 100,686 shares of stock, which together raised about $10.4 million.

In the statement the company explained that Joly had gone through a divorce and needed to sell a portion of his stake in the company to cover the costs.

“He remains heavily invested in Best Buy,” a company spokesman said in the statement.

While Joly’s sale didn’t affect his adherence to Best Buy’s stock ownership guidelines, experts say a stock sale could cause a CEO’s ownership stake to fall below the amount of stock that must be held. In those cases, boards would have to decide if they will waive the policy.

In addition, sales of company shares could also potentially impact the influence a CEO has over a company and board composition, the Stanford article states.

Uneasy Lies the Head

Directors should also be mindful of the possibility that the CEO’s attention could be diverted away from the job of running the company. This is, directors say, the main concern for the board in such events. Several directors report that in their experiences, people double down on work when their personal lives take a turn for the worse, but boards may need to unobtrusively provide additional support to the CEO as he or she works through a difficult period.

Miller says CEOs vary in their ability to separate their personal life from their business life, but notes that he served as the chairman at a company in which the CEO went through a divorce, and the CEO kept the matter entirely separate from his performance at work.

“Nobody even suspected or knew about it,” he says. “It was just kind of something that happened in the background and had no effect on the business and no effect on his productivity.”

Anthony LeVecchio, a director on the boards of several small-cap companies, had a similar experience. A CEO went through a divorce and kept the board apprised of the matter with no impact on the company or his performance.

“As a director, your antenna goes up for sure,” says LeVecchio, who is president of The James Group. “Being the CEO of a public company is demanding enough, let alone to have all these other pressures.”

Many CEOs and high-level executives are calm and collected during divorce proceedings, says Robert Stephan Cohen, a prominent New York divorce lawyer with Cohen Clair Lans Greifer & Thorpe. And oftentimes it’s because someone such as a general counsel or advisor speaks frankly with the CEO and lets them know that it’s best to dispense with the divorce sooner rather than later. However, when money, homes and children are at play, it can be difficult to keep the proceedings unemotional. Some high-powered executives believe they can ride out any negative publicity that might result from a divorce, but typically such cases aren’t resolved without a lot of bloodletting, he says.

“There is always a point where the board and/or the stockholders put pressure on the CEO or the person who is highly placed to give it up,” says Cohen. “The reputational risk is huge and the market cap can be adversely affected.”

And divorce may take its toll on CEOs even after the marriage is over. The Stanford article notes that small samples of data suggest that retirement rates among CEOs are slightly higher following a divorce. Of the 24 CEOs who got divorced between 2009 and 2012, seven, or 29%, stepped down within two years of the settlement, the authors found.

Jordan Neyland, a senior lecturer of finance at the University of Melbourne, examined turnover after divorce among S&P 1500 companies in a 2012 research paper and found that of the 79 who divorced, seven were no longer CEOs at their companies a year afterward. In an e-mail response to questions, Neyland notes that it’s unclear whether this is an abnormally high rate of turnover. However, at least one CEO in his research cited family considerations as their reason for resigning after their divorce.

A Changing Appetite for Risk?

The Stanford article also raises questions about whether a divorce settlement might make a CEO more or less risk averse as a result of the financial implications of ending a marriage. Directors, however, were skeptical about whether CEOs would make business decisions to rebuild their personal wealth that weren’t in the best interests of the company.

Barbara Hackman Franklin, a director on the Aetna board, says major decisions such as a large acquisition would involve a lot of eyes on the deal from the board, management and advisors.

A dramatic change in the CEO’s behavior would be noted, she says, yet it’s impossible for directors to know how a CEO will react after an event like a divorce. There’s no way to assess or measure whether or how a CEO’s risk appetite has changed, particularly if those changes are subtle.

Ultimately, says Franklin, boards that are monitoring performance will notice if something slips, whether it’s because of a divorce, a health problem or some other issue. But CEOs are entitled to have a personal life outside of work, and disclosure to investors about their personal lives isn’t necessary.

“I do believe people are entitled to have private lives,” says Franklin. “Not everything has to be out there in the open forum.”

By Amanda Gerut October 14, 2013